United States

Inclusive Growth: The way forward for the US

Opening Remarks by Angel Gurría, OECD Secretary-General, delivered at the Center for Strategic and International Studies

Washington, 12 June 2014(As prepared for delivery)

Ladies and gentlemen,

I am delighted to be here today at the Centre for Strategic and International Studies. For the past 50 years this institution has been dedicated to driving prosperity in the United States and peace in the world. This is an ideal place to address the challenges of inequality and the need to foster inclusive growth.

As you know from the chorus of voices calling for greater equality – President Obama and President Michelle Bachelet, for example – the issue of inequality has moved to the mainstream of politics and policymaking; the centre stage of the international policy arena. It is one of the most urgent issues threatening the lives of Americans and so many people across the world.

The OECD has been at the forefront of this issue, not least since the publication of our path breaking study, Growing Unequal? in 2008. Since then we have made great advances with our member and partner countries to address the growing divide between the rich and poor. I’d like to take a moment today to share some of the key results of our work.

Inequalities are indisputably rising

The enduring idea that the rising tide of economic growth lifts all boats is no longer a universal truth. In the US, even before the Great Recession, the poorest were steadily losing ground. Between 2000 and 2012 the average disposable income of the bottom 10% in the US fell by 14%. At the same time, top incomes have soared to dizzying heights, as the richest 0.1% earn 8% of national pre-tax income. By comparison, the top 0.1% account for 4-5% of total pre-tax incomes in Canada, the United Kingdom and Switzerland, and close to 3% in Australia, New Zealand and France.

Widening inequality of outcomes – such as income – reflects growing inequality of opportunity. It is increasingly difficult for low-paid workers to climb the social ladder. Over the past few decades, low-paid Americans have worked harder and harder, increasing their average annual working hours by 20%. But their incomes are falling. They are failing to see the fruits of their labour. Most worryingly, inequality risks becoming entrenched, as low-paid workers struggle to afford quality education for their children.

What is driving this trend? Advances in technology, while a key driver of economic growth, generally increase salaries and opportunities for the highly skilled, leaving those with intermediate or low skills behind. On top of this, many countries have undertaken pro-competition reforms in goods and services markets. This is good for productivity and growth, but has polarised wages and affected the poorest most.

And inequality is not only about income; it goes far beyond it and has become truly multi-dimensional. The issue is not one about inequality­, but one about inequalities. In our publication All on Board, we find that rising income inequality is also accompanied by greater polarisation in education and health outcomes.

Our most recent Survey of Adult Skills (PIAAC) revealed that socio-economic background has a stronger impact on adult literacy skills in the United States than in other countries. And literacy skills are linked have a direct link to health. In 2008, the highest educated white males in the US were expected to live 14 years longer than the lowest educated African-Americans.

To address inequalities, we need to change our policy approach

To address inequality in incomes, in health outcomes, in education and in well-being, we need to drastically reconsider our approach to policymaking and our policy tools. We need to focus more on policy synergies and a more tailored approach to policymaking that targets disadvantaged social groups. For example, in our approach to education, we need to create a more level playing field for disadvantaged pupils.

This begins by examining our inequality measurement tools. Let’s start with the misleading concept - a bogeyman - who enters into every policymakers room: Mr. Average. Who is Mr. Average? He does not exist. He is a “statistical construct.” Simply looking at Mr. Average fails to capture and hides the wide disparities among social groups.

Examining instead the entire distribution of incomes will help strengthen our policies, which is also fundamentally about growth. New work underway at the OECD confirms that the vicious cycle of inequality harms economic growth. Those at the bottom of the ladder rarely have the opportunity to increase their earning’s potential and contribute to economic growth.

And let’s remember that growth and equity are natural bedfellows. Without growth there is no way we can raise people’s living standards. But how we can drive inclusive growth, particularly given the new constraints of low demand in a post crisis environment?

To help policymakers lay the foundation for inclusive, equitable and sustainable growth, the OECD has launched an Inclusive Growth Initiative. This is still pretty much work in progress, but it provides an analytical policy framework to identify the adverse effects of rising inequality on growth. The bottom line is that there doesn’t have to be a trade-off between growth and equality: greater inclusiveness and the opening up of economic opportunity can act as drivers, not dampeners, of strong economic performance.

Our approach is first and foremost multi-dimensional, taking account of income but also non-income related outcomes, such as employment and health, in order to provide a more accurate picture of people’s living standards. It also places a great deal of importance on the distribution of these multi-dimensional outcomes within the population, to consider the effects that individual policies have on specific social groups, such as the poor or the median household.

And our framework is about identifying actionable policy recommendations. This helps policy makers to identify, analyse and exploit synergies among policies that can boost both equity and growth, and take compensatory action when trade-offs are present.

The first pillar calls for investing in education and skills to empower the poorest in society. This will help over the long run by reducing wage polarisation, increasing employment, and promoting social mobility. Ensuring equal access to high-quality education and training opportunities can also enhance individual well-being and benefit society at large, by broadening the tax base and increasing the pool of skilled workers. But improving skills will take time – this is not a quick fix!

Secondly, labour market policies need to focus on reactivation measures, to bring disadvantaged groups closer to employment. In recent years we have seen labour market participation in the US edging down towards 60% of the population, compared to pre-crisis levels of over 63%. Yet the US spends only a quarter of the OECD average on reactivation policies.

By implementing reactivation policies that are more family-friendly, or provide women better access to jobs, the US can mobilise more talent to boost growth. Countries like Australia and Denmark have a wealth of experience to share on the successful design of activation programs. In addition, the US survey, which I will present tomorrow, recommends a range of policy measures to help parents better reconcile their work and family lives.

Thirdly, we can reform our tax and benefit systems to ensure a fairer distribution of the benefits of economic growth. Well-targeted support helps prevent low-income families from sliding further down the ladder. In the US, taxes and transfers reduce income inequality among the working age population by 20%, compared to 30% in France and Germany. This means that the US has room for manoeuvre when reviewing both minimum wage levels and instruments such as the Earned Income Tax Credit (EITC).

As top earners now have a greater capacity to pay taxes than before, many OECD governments are considering raising marginal income tax rates and attempting to improve tax compliance, eliminating regressive tax expenditures, and reassessing the role of taxes on property and wealth.

The fourth and final pillar concerns public services. Since spending on cash benefits is much lower in the US than across the OECD, it is particularly important for Americans to have equal access to good health, family care and other social services.

Public policies should focus on equipping people with the tools they need to fight exclusion. Making health insurance coverage universal is a welcome move to reduce health inequalities, but the most vulnerable will need additional attention from policy makers to compensate for bad health outcomes and non-financial barriers to health care. Access and excellence must be the aim for all public services.

Ladies and gentlemen,

The US and the OECD have always been strong partners, and I look for your guidance and support on how we can, together, steer the US towards the vision of social mobility and unlimited opportunity that it so aptly symbolizes throughout the world.

To unleash the unique American spirit – its relentless commitment to hard work and thirst for innovation – we need to create a more level playing field to enable every member of society to flourish.

This is the only way forward in a competitive and globalized world. Thank you.